Many consistent themes occur in our continuous commentary on Supply Chain Matters and one of the most consistent over these past months has been the supply chain setbacks within Boeing’s infamous 787 Dreamliner manufacturing program. One of the most innovative aircraft in terms of bold design was burdened by a supply chain sourcing strategy that has provided multiple setbacks and frustrations.

In August 2010, Supply Chain Matters revisited the admission by Boeing’s CEO of the key importance that Boeing had on its supply chain capability, which was a statement of the obvious. August also provided yet another setback, the admission that important issues with engine supplier Rolls Royce and workmanship problems at Alenia Aeronautica led to a decision to postpone delivery to first initial customer All Nippon Airways (ANA) to the end of 2010.  ANA has 55 Dreamliners on-order. In November, an in-flight incident of an electrical fire and power failure on one of the 787 test aircraft caused another unanticipated and potentially serious delay that pushed back first customer delivery to Q3 of this year.

In May and June of this year, a political eruption occurred when the U.S. National Labor Relations Board (NLRB) filed an unfair labor charge against Boeing in April, related to the company’s intent to open and operate a second final-assembly production line in South Carolina. The decision was based on comments allegedly made by Boeing’s senior management that indicated that the second production line was payback for past labor strikes by Boeing’s union members in Seattle.  The NLRB claimed that Boeing illegally punished its labor union by building the 787 facility in a non-union state, and proposed that the second facility be opened in Washington state. A political firestorm then developed as Boeing motivated national; Republican legislators to shout government intervention. The Boeing PR machine cranked into overtime on developing a Wall Street Journal editorial, authored by CEO Jim McNerney, claiming that Boeing is pro-growth and not anti-union. Mr. McNerney stated in the commentary, “The NLRB is wrong and has far overreached its authority. Its action is a fundamental assault on the capitalist principles that have sustained America’s competitiveness since it became the world’s largest economy nearly 140 years ago.” Mr. McNerney continued with the argument that government overreach could accelerate the flight of middle-class American jobs. Boeing has further stated that it will fight the forced relocation all the way to the Supreme Court, if necessary.

In spite of the PR, the issue of operating the second final assembly line in South Carolina is still in doubt, and the judicial and appeals process adds the potential for more delays.

For the past two weeks, Boeing has been in the process of conducting final certification and acceptance testing of the initial 787 in conjunction with ANA.  The testing process is being conducted in Japan and on Asia air routes, allowing pilots and engineers to mimic ground and air operations. Reports indicate that ANA will begin operation of the 787 initially on domestic routes before moving to international routing.  Reports have been that both Boeing and ANA teams are excited about the testing and pending certification. We checked Jon Ostrower’s Flightblogger and noted a posting that indicates that the timeline of Boeing’s announcements have been very carefully worded, and according to Ostrower, “Either Boeing has decided to add a bit of variety to its wording for 787 first delivery or there is ground work being laid for a delivery after September.”

An article in the Wall Street Journal on July 14 notes more disappointing supply chain news.  Boeing acknowledged that it was halting final assembly of 787’s at the factory in Everett Washington for about a month, to address termed supply chain issues. Ostrower penned another entry quoting Boeing wording that indicates “supplier spot shortages’ and “remaining engineering changes” were the motivator for this newest delay.  Boeing additionally stated that it will comment on any impacts to all downstream deliveries during its July 27 Q2 earnings report.  There has also been speculation as to whether some of Boeing’s suppliers were seriously impacted by the devastating earthquake that occurred in Japan in March.

Boeing faces tough supply chain challenges regarding the 787.  The program is over three years late in deliveries, and the operation of a second final assembly facility to help catch-up on production remains unresolved.  Suppliers have been patient and so have 787 customers, but patience is often fleeting. There is a limit to financial incentives or penalties.

While supply and other visible issues continue, Boeing’s attention is drawn away from other programs.  A previous Supply Chain Matters commentary noted speculation that decision delays on the long-term design of the popular 737 workhorse has led to explosive order rates for the Airbus 320neo aircraft.

We all want and need Boeing to succeed, but events are not lending themselves toward supply chain or customer excellence. Any sustained manufacturing resurgence for the U.S. needs to have Boeing as a key contributor.

As a final note, we continue to reach-out to Boeing to perhaps gain another perspective, but our efforts have not yielded any response.

Bob Ferrari

As if we did not need yet another potential source of supply chain related risks, a news story from Reuters notes that high tech and consumer electronics could be laden with malicious software.

According to a U.S. Congress member with considerable cyber security intelligence, hackers may be injecting malicious codes on electronic components at offshore manufacturing plants, planting tools to help launch future cyber-attacks.

Representative Jim Langevin (Democrat- Rhode Island) is a member of the U.S, House of Representatives committee on Armed Services and Intelligence and is privy to cyber threat information not publically disclosed. The Congressmen has sponsored the Executive Cyberspace Coordination Act of 2011. According to a House press release, the Act “would establish a National Office for Cyberspace to evaluate and enforce requirements for federal agencies to protect themselves and the public, make certain that the government buys the most advanced and secure technology possible, and train a workforce with the ability to defend us against attacks.” In a February 10^th hearing held by the House Intelligence Committee, then CIA Director (now Secretary of Defense) Leon Panetta told the Committee, “the next Pearl Harbor may very well be a cyber attack.”

Readers may note that the Bill includes some provisions that can have supply chain related impacts. The Bill calls for changing federal acquisition policy to drive the market toward more secure products.  It will be rather interesting to speculate what the Congress ultimately determines as  policies for acquisition of secure products are to be. The release mentions “a vulnerability assessment for any system and its significant items of supply prior to development.” That sounds a lot like traceability or certification of supply sources.

Also mentioned is the establishment of the Office of the Chief Technology Officer within the Executive Office of the President.  The first person ever appointed as CIO of the federal government recently resigned after two and a half years on the job and six months after releasing a 25-point plan on the consolidation of over 2000 federal data centers by 2015.  What do you think the odds will be on the future tenure of a U.S. government CTO?

Do not misconstrue, cyber security is a real threat.  Recent multiple attack incidents that have brought big companies down such as Sony, are ample evidence.  Governmental policies and mandates can well be timely, but as is often the case, the devil is in the details of the policies.

In the meantime, consider the possibility that those electronic components embedded in your new tablet, smartphone or laptop could well be a facilitator of a cyber-attack.  Consider that the database holding your company’s mission critical business data or process controls could be hacked by its own hardware host.

Time for another beer!

Bob Ferrari

The effects of the March 11 earthquake that occurred in Japan are now having a visible impact on automotive supply chains.  Toyota is the first of the big three Japanese automotive OEM’s to acknowledge that supply of new vehicles could be significantly impacted during the upcoming summer months.  Reports in both The Wall Street Journal and the Financial Times indicate that Toyota has informed its dealers that parts shortages will significantly curtail production operations in Japan, North America and Europe based production facilities. While Toyota officials indicate it is still too early to ascertain specific cutbacks, nonetheless expectations are now being set for what may come. Inventories of finished vehicles are currently less than 60 days of sales in North America.

Toyota’s North American plants, which are already operating on a constrained schedule, will be idled for five additional days in April, including an extended three day Easter holiday.  The company has also announced that it would halt production at five European plants located in France, Poland, Turkey and the UK for up to eight days late this month and in early May, and operate at a reduced rate for the remainder of May.

The WSJ quotes a Toyota spokesperson as noting that ships carrying new vehicles will depart Japan every two weeks and make subsequent stops at six North American ports to help speed deliveries.

The two other large Japanese OEM’s, Honda and Nissan have refrained from significant comment as to supply, but one has to speculate that both will be impacted in the coming months. Subaru has indicated that it would halt production at its Indiana plant in the U.S. for three days this month because of parts shortages. Having smarted from the previous sudden-unintended-acceleration crisis that occurred a year ago, Toyota is being much more proactive in its communications to consumers and dealers.

Parts shortages for finished vehicles will also have an impact on automotive service and parts suppliers supporting after-market needs.  Toyota had communicated last week that certain parts may be placed on allocation while other parts will be only made available for documented vehicle repair needs.

North America and Europe based automotive OEM’s could benefit from this crisis, but then again may face similar parts supply shortages.  Meanwhile, alternative parts suppliers outside of Japan are being overwhelmed by requests for alternative supply or sourcing certification, perhaps causing more supply restrictions as the summer wears on.

If you directly reside in the automotive industry, please share your own observations as to what you have been hearing in terms of the supply situation over the coming months.

Bob Ferrari

The last few weeks have brought all sorts of concerning news that reinforces multiple supply chain risk and disruption factors.

We at Supply Chain Matters previously noted in our research report of our belief that the two most significant challenges for 2011 would be rising inbound material costs and increased shortages of materials.  What we did not realize was how quickly these forces are accelerating.  So much, in fact, that some economists and Wall Street analysts are beginning to whisper about the potential of a double-dip recession, if commodity shortage trends continue at the current pace. Another concerning development is the spreading political unrest and leadership changes occurring in the Middle East, along with other social tensions in Europe and the U.S..

Let us together begin to connect some dots relative to global events.

The issues of exploding commodity prices are more visible each day, and it seems that at this point, no food or resource related producer is immune.  The challenge for financial and procurement professionals currently lies in assessing to what extent product prices can be raised to offset increased costs without a significant impact or pull back in customer demand.

I just read a very insightful article in Bloomberg BusinessWeek, Hungry for a Solution, which links the social unrest in the Middle East, among other forces,  to be propelled by anger and hunger caused by excessive food prices. One of the disconcerting summaries notes: “Whether the world tips into agricultural mayhem or not depends on the North China Plain’s next wheat harvest.” This article cites the World Bank as noting that rising global food prices have pushed 44 million additional people into extreme poverty in the developing countries. Bloomberg notes that the World Bank is calling for the establishment of coordinated regional food reserves for certain countries and regions. Yesterday, the U.S. Department of Agriculture warned of a protracted period of extremely high food prices that could extend into 2012, with an especially high spike expected in the second half of this year.

Traditional financial media of late has had numerous commentaries concerning current dynamics in the commodities markets.  It seems that buyers who are exercising forward buys to hedge price increases and continuity in supply are running head-on with the usual market speculators and commodity hedge funds, causing prices to spike even further.  Strategic sourcing professionals are caught up in these current dynamics and are most likely experiencing some stressful work days.

Of more concern, political and social unrest across the Middle East, and in particular Libya, are driving up the price of oil and energy, and, if this trend continues, that has significant implications to supply chains.  The price of a barrel of oil has risen 12% alone during these past three days, closing yesterday at $97.28 after closing slightly north of $111 per barrel the day prior.  Morgan Stanley and others analysts have benchmarked the $150 per barrel level as the threshold for triggering significant recessionary forces.  China, now a key player in the global economy has had strong inflationary growth in its economy, and a spike in the cost of energy may trigger more inflation, and higher prices.

Some consumers remain concerned about loss of jobs, high food prices, world and other events impacting their personal wellbeing, while others, who were feeling more confident, are beginning to open their wallets.  The implications for current developments could throw cold water on entire economies and growth momentum.

Now more than ever, procurement and supply chain teams need to come together for developing alternative scenarios for any number of options related to an increasingly uncertain economy, and uncertain customers. If you have not done so by now, insure that you genuinely communicate to key suppliers how important their success is tied to your success.  That does not imply more cost concessions. It implies true collaboration in navigating through some stormy waters ahead.

Invest more time and resources into integrated sales and operations planning, as well as enhanced visibility to what may be occurring at either end of value-chains. Finally, insure that your organization has some form of a supply chain risk identification and mitigation plan.

Storm clouds are brewing and barometers are unsteady.  Be prepared.

Bob Ferrari

In a recent posting in December, we noted that the Supply Chain Matters blog will offer some new and different research and business briefing commentary in 2011.  The goal of this added series is to provide our readers more depth and insight mechanisms addressing the most  important topics directly related to global supply chain business process effectiveness in 2011 and beyond.

One increasingly important and critical issue for supply chain professionals is supply chain risk identification and mitigation.

Supply Chain Risk Management and Mitigation

Incidents of value chain risk and disruption have been a continuous occurrence across global supply chains. The year 2010 was no exception, and included headlines revolving around:

• Toyota’s sudden unattended acceleration product crisis involving multiple vehicle models
• Significant incidents of earthquakes, snowstorms and flooding impacting key global manufacturing centers
• An unprecedented manufacturing quality crisis involving Johnson & Johnson and its McNeill Consumer Products Division
• A terrorist attack involving the use of the global air cargo system to deliver an incendiary device
• The massive salmonella-related recall involving packaged fresh eggs in the U.S.

Supply chain risk management includes a systemic process to identify, evaluate, monitor, control and/or respond to perceived risk conditions. It refers to uncertain and/or unpredictable events affecting one or more organizations, companies or supply networks which have costly results to a business or to a brand.

There are many perceived reasons for these occurrences which can stem from operational, individual product, natural disaster or political and regulatory risk factors. In many cases the companies, organizations or teams impacted may have felt that they had adequate plans in place to either avoid or mitigate these occurrences.  Then again, firms may be in an unprecedented era of many so-called ‘black swan’ events and subsequent impacts.

Critical Challenges

We believe that the most important challenges and concerns related to this topic revolve around these questions:

• What are the various aspects of risk and where in the organization does the accountability for value chain risk reside?
• What are the most important components to a risk mitigation plan?
• How should organizations respond to a risk incident, and what roles do various supply chain functional teams play in a response and mitigation plan?
• How will social-media based communications impact a risk response strategy?
• What role can technology play in identifying and mitigating supply and value-chain risk?

Invitation for Guest Commentary

Our goal in this series is to provide objective insights and an interchange of ideas and learning among a community of cross-functional supply chain professionals.

With this posting, we are extending an invitation to various industry professionals to provide their thoughts and commentary regarding the specific challenges noted above.  A requirement, one that we will screen and edit, is that contributed commentary must be 1) balanced and objective and 2) not slanted to be obvious vendor product, service or corporate marketing content or pitches.  Submissions must not exceed 350-400 words in length, and responsibility for content accuracy and viewpoints lies with the author. Supply Chain Matters and its executive editor reserves the right to approve or reject any individual submissions prior to publishing on this blog.  Please include you name and a short biography, along with contact information.

Business Briefing Research Series

Supply Chain Matters will also be providing our own viewpoints and perspectives on these specific challenges in short downloadable research briefs made available throughout the year. If you are a technology vendor or services provider and would like to sponsor a particular briefing research brief related to this topic of supply and value chain risk management, please send an email to: info <at>supply-chain-matters <dot>com with your name and specific contact information, and we will follow-up.

Thank you.